Sembcorp Industries - Phillip Securities 2019-02-26: Firming Up A Long-Term PPA

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Firming Up A Long-Term PPA

SEMBCORP INDUSTRIES LTD (SGX:U96)'s 4Q18 net profit beat our expectation due to the surprise profit from Marine segment.
SEIL Project 2 is firming up a long-term power purchase agreement.
Utilities’ India operation reported losses due to seasonality and a temporary shutdown.
Marine segment will continue to drag the group’s performance in FY19.
After incorporating a higher target price of S$1.78 for Sembcorp Marine, based on sum-of-the-parts method, we maintain our call to BUY with a higher target price of S$3.75 (previously S$3.60).

In 4Q18, SEIL Project 2 (formerly known as SGPL) narrowed losses by SG$7.5mn due to a slightly higher plant load factor and the improvement of spark spread. In Feb-19, it received the letter of award to supply 500MW of power to Andhra Pradesh for eight years.

In 4Q18, Utilities’ India operation turned a net loss of SG$15.7mn (3Q18: SG$29mn). The net profit shortfall from SEIL Project 1 (formerly known as TPCIL) was attributable to the shutdown of unit 1 for equipment inspection which is expected to resume operation by the end of Feb-19.
Meanwhile, the weak performance of SGIL was due to the low wind season in 4Q18, offsetting the other income of SG$9mn related to the settlement of contractor.

In FY18, UK PR reported losses of SG$24mn which was attributable to one-off acquisition and restricting costs. The UK capacity market was suspended, resulting in a flood of power into the other trading markets and depressed power prices. UKPR is facing market uncertainties subject to the regulatory changes and government plans.

SEMBCORP MARINE LTD (SGX:S51) reported a net profit of S$4.8mn in 4Q18. The net order book continues to decline (FY18: S$6.2bn vs FY17 (restated): S$8.4bn). Work volume will remain low, and margins are compressed.

According to EMA, 700MW of capacity will be retired in Singapore power market in 2019. However, excessive supply will remain, and the market is still intensely competitive. The group will enhance Utilities’ Singapore performance throughout improving the gas business. It could take advantage of index arbitrage between pipe natural gas and LNG.
The competitive edge on winning the long-term PPA for SEIL Project 2 is the sustainability which is a steady supply of power to the state without the issues of fuel shortage. Quite a few power plants in India underutilise due to intermittent supply of coal. Therefore, we expect the group to secure the contract this year.
For UK PR, the group will target the grid market by upgrading the capacity to lift revenue. Meanwhile, Sembcorp Marine’s profitability will remain weak in the protracted cyclical downturn.

After incorporating a higher target price of S$1.78 for Sembcorp Marine, based on sum-of-the-parts method, we maintain our call to BUY with a higher target price of S$3.75 (previously S$3.60).

Chen Guangzhi Phillip Securities Research | https://www.stocksbnb.com/ 2019-02-26

SGX Stock Analyst Report BUY MAINTAIN BUY 3.75 UP 3.600